Report: Rising Costs, Volatile Revenues Pose Challenge to Stability of Small Businesses in Nigeria

Emma Okonji

The Financial Access Initiative (FAI) research center of New York University (NYU), in collaboration with the Nigerian National Bureau of Statistics (NBS), has released the results of the Nigeria Small Firm Diaries (SFD) study, which blamed the rising costs and volatile earnings of small business for their drawbacks.

Supported by the Mastercard Center for Inclusive Growth (CFIG), the Bill & Melinda Gates Foundation (BMGF), and the Argidius Foundation, the global research project provides insight into the financial lives of small businesses in seven countries across Latin America, sub-Saharan Africa and Asia.

In Nigeria, the study collected data from 161 small businesses in urban and suburban areas surrounding three locations: Enugu, Kaduna, and Lagos, between August 2021 and August 2022. The study was focused on three industries—light manufacturing, agri-processing, and services, which all play a key role in Nigeria’s economic growth and development. 

The study found that the Nigerian firms earn less than firms in the other countries studied.

“About half (46 per cent) of the Nigerian firms reported holding a loan of any kind, most of the from informal sources, including suppliers, friends, and family. The research also concentrated on the welfare of employees in small firms, finding that the firms were not able to provide consistent income to workers. The small firms, like those in the other countries studied, experience volatile earnings, as both revenue and expenses fluctuate from month-to-month, “the report stated.

According to the report, when asked about their vision for their business, a large group of Nigerian firms (44 per cent) said they wanted to both grow and gain stability, but does not want to take on the additional risk. They want step-by-step growth that helps reduce volatility and risk.

Compared with other countries in the study, the report noted that Nigerian firms have high rates of bank account ownership, as 97 per cent of small firm owners in Nigeria have bank accounts for business, more than in Kenya (79 per cent), Colombia (70 per cent), or Indonesia (65per cent). The report however said that usage of accounts was less comprehensive, with only 20 per cent of Nigerian firms moving more than three quarters of their transactions through bank accounts, “as cash is still the dominant mode of transaction for this segment.”

In the area of digital financial services, the report said Nigerian small firm owners use technology, adding that three-quarters use either a smartphone or computer, or both for their business, as well as digital financial services, particularly debit cards, mobile banking, and ATMs. It however said they use mobile wallets for business purposes at very low rates.

In the area of credit gaps, the data from the study shows that working capital and liquidity are bigger needs to small firms than investment capital. Despite access to finance being a major barrier to firm owners’ vision for success, more than 40 per cent of firm owners in Nigeria say they rarely or never need a loan, indicating that products in the market are not accessible or don’t meet their needs.

The study concluded that stability and growth is a priority for the entrepreneurs who participated in the year-long study. According to the research, firms face high volatility in income and expenses. They cited access to finance, followed by rising supply costs as major barriers to achieving their vision of growth and stability.

Analysing the report, Statistician General of the National Bureau of Statistics, Adeyemi Adeniran, said:  “The study is unique in Nigeria, since it is the first large-scale project to gather high-frequency data from businesses of this size, and will allow policymakers to better understand and address the challenges facing small businesses.”

Executive Director of the Financial Access Initiative and Professor of Public Policy and Economics at New York University, Jonathan Morduch, said: “MSMEs are by far the biggest employer in low and middle-income economies. Despite decades of statistical research, fundamental questions remain about why some grow, and some stagnate. Our aim with the study has been to understand small firms from the bottom-up, by listening closely to how entrepreneurs and workers make choices on their own terms.”